HANOI - A proposed free-trade agreement (FTA) between the European Union and
Vietnam promises to bolster already fast-rising bilateral trade. While both
sides agree an FTA would on the whole be mutually beneficial, negotiations will
likely be complicated by the potential socio-economic impacts a pact would have
on Vietnam's fragile transitional economy.
Negotiations, which started last
June, are expected to be finalized by the end of 2015. The two sides cooperated
earlier in a ''scoping'' phase, in which the EU assisted Vietnam in meeting
prerequisites for its 2007 accession to the World Trade Organization (WTO). The
next phase of that cooperation, the European Trade Policy and Investment
Support Project (EU-MUTRAP), will be crucial to addressing macroeconomic
imbalances as Vietnam becomes more integrated into the global economy.
The EU is one of Vietnam's
leading trade and investment partners. In 2012, it became the largest importer
of Vietnamese products, led by shipments of footwear, textiles, coffee, rice
and seafood, after imports rose 22.5% year-on-year to a total value of US$20.3
billion and accounting for 17.7% of Vietnam's exports. The EU is also one of
Vietnam's largest sources of foreign direct investment.
Last December, the EU concluded
an FTA with Singapore. Negotiations towards a similar deal are underway with
Malaysia, while official talks with Thailand were announced this month. While
those potential deals promise to give European exporters greater access to the
region's dynamic markets, activist groups have complained that the stronger
intellectual property rights to be included in the pacts will hinder access to
various life-saving medicines.
FTA negotiations with Vietnam
will aim to roll back tariffs and non-tariff barriers to trade. Other
trade-related areas such as public procurements, regulatory issues, local
market competition and intellectual property rights will also be prioritized by
EU negotiators. Vietnam, on the other hand, is expected to push for more
streamlined compliance mechanisms to meet rising EU import regulations on food
hygiene, chemical residues, illegal fishing and legally cut timber.
Vietnamese food exporters in
particular have complained that those regulations amount to non-tariff barriers
and have made it more difficult to export their products to the EU. Last year,
Vietnamese food exports were found to violate EU hygiene requirements on at
least two occasions. The EU maintains discretionary power to ban the import of
products if there are more than five violations in any given year.
Despite those obstacles, Hanoi
aims to expand its presence in lucrative EU markets. Vietnamese negotiators are
expected to press Brussels to grant Vietnam the preferential status given to
market economies - a recognition that Hanoi has indicated it wants this
included in any potential FTA.
That aim was underlined in January
during Party General Secretary Nguyen Phu Trong's European tour. During his
meeting with European Commission President Jose Manuel Barroso, both agreed
that the first rounds of negotiations were important ''to establish closer
political and economic ties and all-sided cooperation and enjoy an equal
partnership''.
Whether the negotiations are
truly on an equal footing is debatable. ''The Vietnamese know quite well that
the EU is negotiating with other Asian countries and cannot lag behind,
otherwise the risk could be losing competitiveness,'' said Claudio Dordi, team
leader of the EU's trade and investment support program for Vietnam.
Competitive pressures
Vietnamese exports could thus
lose competitiveness vis-a-vis regional countries that already have an FTA in
place with the EU while negotiations continue. Currently, average tariffs
applied on goods ''Made in Vietnam'' and exported to the EU are just over 4%,
with products like garments, seafood and footwear subjected to higher rates of
11.7%, 10.8% and 12.5% respectively.
Tariffs applied to EU exports to
Vietnam have been substantially reduced since Hanoi's accession to the WTO,
falling from an average of 13.7% in 2005 to 9.3% at present. Sectors such as
automobiles, of which import taxes still average around 24.2%, would benefit
immensely from a tariff-reducing FTA and possibly promote more EU investments.
''We always look at investments
in Vietnam, but in this country there are young and professional people who
have ideas and money and who might be interested in investing in Europe,'' said
Michael Behrens, chief executive officer of Mercedes-Benz Vietnam Ltd on the
sidelines of the third EU-ASEAN business summit held in Hanoi this month.
"This is the long term road which Europe should look at.''
Even though Vietnamese exports to
the EU have risen in the past decades, enterprises will have to strengthen
their competitive capabilities and product quality to sustain the trend. Weak
accounting systems have made Vietnamese firms vulnerable to anti-dumping
charges in the EU, seen in recent cases filed against Vietnamese tiger shrimp
and leather shoe producers.
For sectors such as textiles,
agreements on rules of origin will determine how much Vietnamese exporters
benefit from a possible FTA. Garments labeled ''Made in Vietnam'' are often
produced using yarn and fabrics imported from China. Imported inputs from a
more developed country like China has meant Vietnamese textiles are often
excluded from the Generalized System of Preferences that the EU applies ''to
address the special needs of the least developed countries''.
''Rules of Origins will be one of
the major topics during the next rounds of negotiations,'' said Dordi. He noted
that the EU's trade and investment support program with Vietnam gives technical
assistance to Vietnamese firms to keep them up-to-date on EU technical
standards and market information, including trends in consumer demand.
While Vietnam presses for greater
access to EU markets, some analysts warn that Hanoi has not weighed the full
potential impact of an FTA. ''Too much liberalization without a proper roadmap
[and] compatibility with socio-economic development level[s] will create
adverse impacts on the economy and restrict the benefits from service trade
liberalization,'' according to a recent research paper published by the Vietnam
Peace and Development Foundation, an independent think tank.
Vietnam's laggard and often
mismanaged state-owned enterprises will be hard-pressed to compete with
European competitors in liberalized service sectors such as ports, logistics
and communications - all expected target areas for EU investment. While an
EU-Vietnam FTA will likely create more opportunities for urban-based
professionals and skilled labor, disadvantaged remote areas will face the risk
of even wider social, economic and geographic development gaps.
Roberto Tofani
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Health care and Life Science with expertise in ASEAN 's area. We are currently changing the platform of www.yourvietnamexpert.com, if any request, please, contact directly Dr Christian SIODMAK, business strategist, owner and CEO of SBC at christian.siodmak@gmail.com. Many thanks.
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